Foxmayer Case Study

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A Major Failed ERP Implementation—FoxMeyer Drug

Mohamed Mohamoud and Jing Lei

Table of Contents

• Case Study: FoxMeyer Drug

o Background of FoxMeyer

o Implementation of ERP and the Selection of SAP R/3

o Bankruptcy Nightmare

o What exactly went wrong?

o Lessons from Failure

o Conclusion

• References

• Appendix

Case Study: FoxMeyer Drug

Background of FoxMeyer

Business

FoxMeyer Drug, a holding company in the health care services industry, with 2700 employees in 23 union and non-union locations throughout the US and Canada. In December 1995, FoxMeyer Drug was a $5 billion-a-year company, one of the leaders among distributors of pharmaceuticals. The business of FoxMeyer included the following:

1. Distribute a full line of pharmaceutical products and health and beauty aids to chain stores, independent drug stores, hospitals, and other health care facilities. In other words, FoxMeyer’s customers were retailers and dispensers. 2. Provide managed care and information-based services to health care facilities, pharmacies and physicians. 3. Conduct business in franchising variety stores and the franchising and operation of crafts stores, and wholesale distribution of products to those stores.

Prior Information System

Prior to adoption of SAP, FoxMeyer had three linked data processing centers. Their old system involved customers filling out electronic orders, which were sent to one of their three data processing centers. Orders were filled manually and packaged within 24 hours. The company had recently completed a national distribution center with multiple carousels and automated picking, with the capability of tracking inventory to secondary locations.

Implementation of ERP and the Selection of SAP R/3

Driving Factors

• High Growth in Health Care

FoxMeyer, which was more than a century old, was nearing a crossroads by the mid-'90s. Thanks to the aging of America and a stream of new wonders from labs, pharmaceutical sales were exploding. Due to aging population and growth in health care in United States, FoxMeyer anticipated high growth in their industries.

• Extreme price competition, threatening margins

There was high growth in this market indeed, but pharmaceutical distributors' profit margins were thin as political and social pressures on health care costs mounted and as the cutthroat distribution business began to consolidate. FoxMeyer wanted to be a survivor.

• High Orders Processing

FoxMeyer had orders for over 300,000 items per day and had to process hundreds of thousands of transactions each day. As explained by former investor relations executive with FoxMeyer, "Shipping pharmaceuticals isn't like shipping bananas. There are a lot of government controls and procedures in different states. Many drugs are heavily secured. Some quickly expire. Meanwhile, hospitals need these drugs, because they're literally dealing with life and death. You can't make arbitrary or late shipments."

• Long-term strategies

This industry was characterized by extreme price competition, which threatened FoxMeyer margins. Therefore, FoxMeyer adopted long-term strategies of efficiently managing inventory, seeking lower operating expenses, stronger sales & marketing and expanded services.

• Old Unisys Mainframe

FoxMeyer's old Unisys mainframe was creaking under the strain. It could only track inventories daily, for example, as shipments came and went-not minute by minute, as had become the standard at some competitors. Many of its 30 warehouses across the country were older buildings operating on clunky software. Moreover, its Unisys system was being phased out by the vendor and needed to be replaced. The Delta project was envisaged as a client/server R/3 solution integrated with automated warehouses to accommodate future company growth.

Decision to Install ERP

Based on a supply chain analysis, it...
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